2019 Year-End Tax Planning Tips & Traps

As the end of the year is fast approaching, we should consider any last-minute strategies that might help reduce your 2019 tax bill. Last year was the first year to be impacted by the Tax Cuts and Jobs Act of 2017 (TCJA). While there was plenty of clarifying guidance on application of the TCJA, there were was no significant new legislation in 2019 affecting individual taxes. But situations do change from year to year, thus requiring a fresh look at how to approach year-end tax planning. The following are strategies that may benefit you and that we should discuss before December 31.

Bunching Deductions into 2019

As you may know, TCJA significantly increased the standard deduction for all taxpayers. This means that many individuals who previously received a tax benefit by itemizing deductions no longer do because taking the standard deduction is more advantageous. For 2019, the standard deduction is $12,200 for single taxpayers, $24,400 for married taxpayers filing a joint return, $18,350 for taxpayers filing as head of household, and $12,200 for married taxpayers filing separately.

In addition, there is a $10,000 limitation ($5,000 in the case of married taxpayers filing separately) on the combined amount of state income taxes and property taxes that may be deducted when itemizing. Unfortunately, this $10,000 limitation applies to single as well as married taxpayers and is not indexed for inflation.

If the total of your itemized deductions in 2019 will be close to your standard deduction amount, alternating between bunching itemized deductions into 2019 and taking the standard deduction in 2020 (or vice versa) could provide a net-tax benefit over the two-year period. For example, if you give a certain amount to charities each year, and if it’s financially feasible, you might consider doubling up this year on your contributions rather than spreading the contributions over a two-year period. If these amounts, along with your mortgage interest and medical expenses exceed your standard deduction, then you should double up on the expenses this year and take the standard deduction next year.

Similar opportunities may be available for bunching property tax payments and state income tax payments, subject to TCJA’s $10,000 limitation on deductions for such payments. This strategy can be especially attractive for single taxpayers because the standard deduction is so much lower for single individuals. It’s important to remember, however, that the deduction for property taxes applies only to property taxes that have been assessed. Thus, if the assessment for 2019 property taxes occurred in 2018 and the taxes are due in 2019, you can deduct in 2019 the taxes assessed for 2019 that you have paid as well as the property taxes assessed for 2020, assuming you also pay the 2020 taxes in 2019.

Finally, if any of your real estate or income taxes can be allocated to a trade or business, they are not subject to the $10,000 limitation.

Medical Expenses and Health Savings Accounts

For 2019, your medical expenses are only deductible as an itemized deduction to the extent they exceed 10 percent of your adjusted gross income. Depending on what your taxable income is expected to be in 2019 and 2020, and whether itemizing deductions would be advantageous for you in either year, you may want to accelerate any optional medical expenses into 2019 or defer them until 2020. The right approach depends on your income for each year, expected medical expenses, as well as your other itemized deductions.

However, health saving accounts (HSAs) present an attractive alternative. If you are eligible to set up such an account, you can deduct the amount you contribute to the account in computing adjusted gross income. Thus, the contributions are deductible whether you itemize deductions or not. Distributions from an HSA are tax free to the extent they are used to pay for qualified medical expenses (i.e., medical, dental, and vision expenses). For 2019, the annual contribution limits are $3,500 for an individual with self-only coverage and $7,000 for an individual with family coverage.

Mortgage Interest Deduction

If you sold your principal residence during the year and acquired a new principal residence, the deduction for any interest on your acquisition indebtedness (i.e., mortgage) could be limited. The TCJA limits the interest deduction on mortgages of more than $750,000 obtained after December 14, 2017. The deduction is limited to the portion of the interest allocable to $750,000 ($375,000 in the case of married taxpayers filing separately). For mortgages acquired before December 15, 2017, the limitation is the same as it was under prior law: $1,000,000 ($500,000 in the case of married taxpayers filing separately). However, as discussed below, if you operate a business from your home, an allocable portion of your mortgage interest is not subject to these limitations.

You can potentially deduct interest paid on home equity indebtedness, but only if you used the debt to buy, build, or substantially improve your home. Thus, for example, interest on a home equity loan used to build an addition to your existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not.

Home Office Expenses

When the TCJA eliminated the miscellaneous itemized expense deduction, it eliminated the ability of employees to deduct home office expenses. However, taxpayers with their own business can still file a Schedule C and take a home office expense deduction if part of the home is used for that business. State income taxes, property taxes, and home mortgage interest allocable to your business can also be deducted and such deductions are not subject to the limitations that apply to individual taxpayers who do not operate a Schedule C business from their home.

Revised Kiddie Tax Rules

One of the changes made by TCJA involves what is known as the “kiddie tax.” The kiddie tax applies to a child’s net unearned income (e.g., dividends, interest, and capital gain distributions) over $2,200. While such income used to be taxed at the parent’s marginal income tax rate and took into consideration the unearned income of any siblings, TCJA simplified the calculation so that the child’s unearned income is taxed at trust and estate tax rates. Although the trust and estate tax rates are similar to the individual tax rates, the tax brackets are much lower, meaning higher rates of tax apply to lower levels of income.

For 2019, the top marginal tax rate for a couple filing a joint return is 37% for taxable income over $612,350. For income subject to the estate and trust tax rates, the 37% tax rate begins at taxable income over $12,750. There is a way to save some taxes here, however, if your child is under the age of 18 at the end of 2019 and didn’t have earned income that was more than half of the child’s support, or a full-time student at least age 19 and under age 24 and the end of 2019 and didn’t have earned income that was more than half of the child’s support. For such children, you can elect to include the child’s income on your tax return. However, we would need to evaluate whether adding such income to your tax return would subject you to the net investment income tax of 3.8 percent.

Child-Related Expenses and Credits

While the TCJA eliminated the personal and dependent exemption deductions that applied to tax years before 2018, it increased the child tax credit available for years after 2017 and increased the income level at which taxpayers are eligible for the credit. For 2019, if you file a joint return and your modified adjusted gross income (MAGI) is $400,000 or less, you are eligible for a $2,000 child tax credit for each qualifying child. If you are filing as single, head of household, or married filing separately, the MAGI limitation for claiming a child tax credit is $200,000 or less. For income above those levels, a pro rata credit may be available depending on total MAGI. Taxpayers with income below certain thresholds may be eligible for a refundable child tax credit.

Additionally, if you paid someone to take care of your child or a dependent so you can work or look for work, you may be entitled to a tax credit for up to 35 percent of the expenses paid. The amount of employment-related expenses used to calculate the credit is generally limited to $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals. Various qualifications must be met in order to be eligible for the credit, but if you incurred such expenses, you may qualify. Additionally, if you paid someone to come to your home and care for a child or dependent, you may be a household employer subject to employment taxes.

If you incurred expenses to adopt a child, you may be eligible for a tax credit of up to $14,080 for some or all of those expenses. The determination of the tax year in which qualified adoption expenses are allowable as a credit depends on whether the expenses were paid before the year in which the adoption became final or whether they were paid during or after the year in which the adoption became final.

Education-Related Deductions and Credits

While the tuition and fees deduction that had previously been available expired at the end of 2017 along with the miscellaneous itemized deduction for work-related education expenses, other education-related tax deductions, credits, and exclusions from income may apply for amounts paid in 2019. Tax-free distributions from a qualified tuition program of up to $10,000 are now allowed for elementary or secondary school tuition. In addition, if your modified adjusted gross income level is below certain thresholds, the following are available for 2019:

· an exclusion from income for education savings bond interest;

· a deduction for student loan interest; and

· a lifetime learning credit of up to $2,000 for tuition and fees paid for the enrollment or attendance of yourself, your spouse, or your dependents for courses of instruction at an eligible educational institution.

Charitable Contribution Deductions

As a result of the increase in the standard deduction, some taxpayers are no longer getting a benefit from itemizing their deductions, such as charitable contributions, as they once were. However, as noted above, you can still help charities and get a tax benefit if you contribute enough to get over the standard deduction amount or bunch itemized deductions that would otherwise be spread over multiple years into one year.

Additionally, you can reap a larger tax benefit by donating appreciated assets, such as stock, to a charity. Generally, the higher the appreciated value of an asset, the bigger the potential value of the tax benefit. Donating appreciated assets not only entitles you to a charitable contribution deduction but you also avoid the capital gains tax that would otherwise be due if you sold the stock. For example, if you own stock with a fair market value of $1,000 that was purchased for $250 and your capital gains tax rate is 15 percent, the capital gains tax would be $113 ($750 gain x 15%). If you donate that stock instead of selling it, and are in the 24 percent tax bracket, you get an ordinary income deduction worth $240 ($1,000 FMV x 24%). You also save $150 in capital gains tax that you would otherwise pay if you sold the stock. Thus, the after-tax cost of the gift of appreciated stock is $647 ($1,000 – $240 – $113) compared to the after tax cost of a donation of $1,000 cash which would be $760 ($1,000 – $240). However, it’s important to also keep in mind that tax deductions for appreciated property are limited to 50 percent of your adjusted gross income.

Finally, taxpayers 70 1/2 years old and older who own an individual retirement account (IRA) are required to take minimum distributions from that account each year and include those amounts in taxable income. If you are in this category, a special rule allows you to make a charitable contribution directly from your IRA to a charity. This has several benefits. First, since charitable contributions deductions are usually only available to individuals who itemize, individuals who take the standard deduction instead can benefit from this rule. Second, making the contribution directly to a charity counts towards your required minimum distribution but that amount is not included in income and thus reduces your taxable income and adjusted gross income (AGI). A lower AGI is advantageous because it increases your ability to take medical expense deductions that you might not otherwise be able to take. For example, medical expenses are only deductible to the extent those expenses exceed 10 percent of your AGI and a lower AGI means you can deduct more medical expenses. In addition, as AGI increases, more of your social security income is subject to tax. Finally, the 3.8 percent net investment income tax applies to the extent your AGI exceeds a certain level.

Rental Real Estate

If you own rental real estate, you may be eligible for a special tax break – TCJA’s Section 199A deduction – which is based on a percentage of income earned by the rental real estate activity. In order to be eligible for the deduction, the activity must be considerable, regular, and continuous in scope. In determining whether your rental real estate activity meets those criteria, relevant factors include, but are not limited to, the following:

· the type of rented property (commercial real property versus residential property);

· the number of properties rented;

· you or your agent’s day-to-day involvement;

· the types and significance of any ancillary services provided under the lease; and

· the terms of the lease (for example, a net lease versus a traditional lease and a short-term lease versus a long-term lease).

Under a safe harbor issued by the IRS, a rental real estate activity will be treated as a business eligible for the special deduction if certain requirements are satisfied, such as:

· separate books and records are maintained to reflect the income and expenses for each rental real estate enterprise;

· for rental real estate enterprises that have been in existence less than four years, 250 or more hours of rental services are performed per year with respect to the rental real estate enterprise (with slightly less stringent requirements for rental real estate enterprises that have been in existence for at least four years);

· contemporaneous records have been maintained, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services; and

· certain compliance requirements are met.

If you think you may be eligible for this deduction, we should get together to nail down any last steps you may need to take to fall within the safe harbor. Alternatively, even if you don’t meet the safe harbor requirements, you may still be eligible for this deduction.

In addition, if you rent out a vacation home that you also use for personal purposes, we should review the number of days it was used for business versus pleasure to see if there are ways to maximize tax savings with respect to that property.

Retirement Planning

By investing in a qualified retirement plan you’ll not only receive a current tax deduction, thereby reducing current year income tax, but you can sock away money for your retirement years. If your employer has a 401(k) plan and you are under age 50, you can defer up to $19,000 of income into that plan. Catch-up contributions of $6,000 are allowed if you are 50 or over.

If you have a SIMPLE 401(k), the maximum pre-tax contribution for 2019 is $13,000. That amount increases to $16,000 if you are 50 or older.

If certain requirements are met, contributions to an individual retirement account (IRA) may be deductible. If you are under 50, the maximum contribution amount for 2019 is $6,000. If you are 50 or older but less than 70 1/2, the maximum contribution amount is $7,000. Contributions exceeding the maximum amount are subject to a 6 percent excise tax. Even if you are not eligible to deduct contributions, contributing after-tax money to an IRA may be advantageous because it will allow you to later convert that traditional IRA to a Roth IRA. Qualified withdrawals from a Roth IRA, including earnings, are free of tax, while earnings on a traditional IRA are taxable when withdrawn.

If you already have a traditional IRA, we should evaluate whether it is appropriate to convert it to a Roth IRA this year. You’ll have to pay tax on the amount converted as ordinary income, but subsequent earnings will be free of tax and the decrease in tax rates that are effective this year makes such a conversion less costly than it would have been in previous years. Of course, this option only makes sense if the tax rates when the money is withdrawn from the Roth IRA are anticipated to be higher than the tax rates when the traditional IRA is converted. And if you have a traditional 401(k), 403(b), or 457 plan that includes after-tax contributions, you can generally rollover these after-tax amounts to a Roth IRA with no tax consequences. A rollover of a SIMPLE 401(k) into a Roth IRA may also be available. As with all tax rules, there are qualifications that apply to these rollovers that we should discuss before any actions are taken.

Finally, if you make qualified retirement savings contributions during 2019 you can claim a retirement savings credit of up to $1,000 (single or head of household) or $2,000 (joint filers) if your adjusted gross income does not exceed $64,000 (married filing jointly), $48,000 (head of household), or $32,000 (all other taxpayers).

Reevaluating Your Stock Portfolio

Year end is a good time to review your stock portfolio to see if you might want to divest yourself of stocks that have lost value since you originally bought them. We should evaluate whether you might benefit from selling off appreciated stocks, particularly those that would generate a short-term capital gain, and using the resulting gain to limit your exposure to a long-term capital loss on stocks you may want to dump, since the deduction of long-term capital gains is limited. And any net capital gain you may reap will be taxed at the substantially reduced capital gain tax rate.

The tax rate for net capital gain is generally no higher than 15 percent for most taxpayers. Some or all of your net capital gain may be taxed at 0 percent if your income is not above $39,375 (single), $78,750 (joint), or $52,750 (head of household). However, a 20 percent tax rate on net capital gain does apply to the extent that your ordinary taxable income is over $434,550 (single), $488,850 (joint), $244,425 (married filing separately), or $461,700 (head of household). Additionally, the following types of capital gains have different tax rate structures: (1) the taxable part of a gain from selling certain qualified small business stock is taxed at a maximum 28 percent rate; (2) the net capital gain from selling collectibles (such as coins or art) is taxed at a maximum 28 percent rate; and (3) the portion of certain unrecaptured gain from selling real property is taxed at a maximum 25 percent rate. If you have been involved in any such transactions during the year, we should review your options for reducing the tax on those transactions.

Substantial Increases in Deductions or Nontaxable Income Could Result in AMT Exposure

While fewer taxpayers are subject to the alternative minimum tax (AMT) as a result of the TCJA increasing exemption amounts and raising the exemption phaseout levels, the AMT is not completely dead. Certain adjustments to your taxable income, or certain exclusions from gross income, for regular tax purposes are not allowed for AMT purposes and will increase your AMT income (AMTI), thus potentially subjecting you to the AMT. Typical items which may reduce regular income but are not allowed for AMTI purposes include the standard deduction, the state and local income tax deduction, and the deduction for property taxes. In addition, the exercise of incentive stock options can result in AMT income, whereas such income is not recognized for regular tax purposes. Thus, if you have exercised any incentive stock options or have had a substantial increase in certain deductions in 2019, but have not previously been subject to the AMT, there is the possibility that you could be subject to the AMT for 2019.

If you work from home, one strategy for avoiding the AMT is to allocate part of your mortgage interest or property taxes to your Schedule C business. To the extent you can claim items on your Schedule C, they aren’t added back in calculating AMTI.

While all taxpayers are eligible for an exemption from the AMT, the amount of the exemption depends on your filing status. For 2019, the exemption amounts for individuals, other than those subject to the kiddie tax, are (1) $111,700 in the case of a joint return or a surviving spouse; (2) $71,700 in the case of an individual who is unmarried and not a surviving spouse; and (3) $55,850 in the case of a married individual filing a separate return. However, these exemptions are phased out by an amount equal to 25 percent of the amount by which your alternative minimum taxable income (AMTI) exceeds: (1) $1,020,600 in the case of married individuals filing a joint return and surviving spouses and (2) $510,300 in the case of all other individuals.

Planning for the 3.8 Percent Net Investment Income Tax

A 3.8 percent tax applies to certain net investment income of individuals with income above a threshold amount. The threshold amounts are $250,000 (married filing jointly and qualifying widow(er) with dependent child), $200,000 (single and head of household), and $125,000 (married filing separately). In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, and income from businesses involved in trading of financial instruments or commodities. Thus, while the top tax rate for qualified dividend income is generally 20 percent, the top rate on such income increases to 23.8 percent for a taxpayer subject to the net investment income tax (NIIT).

If it appears you may be subject to the NIIT, the following actions may help avoid the tax and we should discuss whether any of these options make sense in light of your financial situation.

· Donate or gift appreciated property. As discussed above, by donating appreciated property to a charity, you can avoid recognizing the appreciation for income tax purposes and for net investment income tax purposes. Or you may gift the property so that the donee can sell it and report the income. In this case, you’ll want to gift the property to individuals that have income below the $200,000 (single) or $250,000 (couples) thresholds.

· Replace stocks with state and local bonds. Interest on tax-exempt state and local bonds are exempt from the NIIT. In addition, because such interest income is not included in adjusted gross income, it can help keep you below the threshold for which the NIIT applies.

· If you are in the real estate business, we should review the criteria for being classified as a real estate professional in addition to the criteria necessary for meeting the safe harbor requirements mentioned above for obtaining the qualified business income deduction. If you meet the requirements for being a real estate professional, your rental income is considered nonpassive and thus escapes the NIIT.

· If you intend to sell any appreciated assets, consider whether the sale can be structured as an installment sale so the gain recognition is spread over several years.

· Since capital losses can offset capital gains for NIIT purposes, consider whether it makes sense to sell any losing stocks, but keeping in mind the transaction costs associated with selling stocks.

· If you have appreciated real property to dispose of and are not considered a real estate professional, a like-kind exchange may be more advantageous. By deferring the gain recognition, you can avoid recognizing income subject to the NIIT.

Because the NIIT does not apply to a trade or business unless (1) the trade or business is a passive activity with respect to the taxpayer, or (2) the trade or business consists of trading financial instruments or commodities, we may want to look at ways in which a venture you are involved with could qualify as a trade or business. However, such classification could have Form 1099 reporting implications whereas personal payments are not reportable if your activity is not considered a trade or business.

Additional Medicare Tax

An additional Medicare tax of 0.9 percent is imposed on wages, compensation, and self-employment income in excess of a threshold amount. The threshold amounts are $250,000 (joint return or surviving spouse), $125,000 (married individual filing a separate return), and $200,000 (all others). However, the threshold amount is reduced (but not below zero) by the amount of the taxpayer’s wages. Thus, a single individual who has $145,000 in self-employment income and $130,000 of wages is subject to the .9 percent additional tax on $75,000 of self-employment income ($145,000 – $70,000 (the $200,000 threshold – $130,000 in wages)). No tax deduction is allowed for the additional Medicare tax.

For married couples, employers do not take a spouse’s self-employment income or wages into account when calculating Medicare tax withholding for an employee. If you and your spouse will exceed the $250,000 threshold in 2019 and have not made enough tax payments to cover the additional .9 percent tax, you can file Form W-4 with the IRS before year end to have an additional amount deducted from your paycheck to cover the additional .9 percent tax. Otherwise, underpayment of tax penalties may apply.

Timing Income and Deductions

If there is going to be a dramatic swing in your taxable income or your life circumstances between 2019 and 2020, it may make sense to either: (1) accelerate income into 2019 and defer deductions into 2020, or (2) accelerate deductions into 2019 and defer income into 2020.

· Accelerating Income into 2019. Options for accelerating income include: (1) harvesting gains from your investment portfolio, keeping in mind the 3.8 percent NIIT; (2) converting a retirement account into a Roth IRA and recognizing the conversion income this year; (3) taking IRA distributions this year rather than next year; (4) if you are self-employed and have clients that owe you money, try to get them to pay before year end; and (5) settling any outstanding lawsuits or insurance claims that will generate income this year.

· Deferring Deductions into 2020. If you anticipate a substantial increase in taxable income next year, it may be advantageous to push deductions into 2020 by: (1) postponing year-end charitable contributions, property tax payments, and medical and dental expense payments, to the extent deductions are available for such payments, until next year; and (2) postponing the sale of any loss-generating property.

· Deferring Income into 2020. If it looks like you may have a significant decrease in income next year, either from a reduction in income or an increase in deductions, it may make sense to defer income into 2020 or later years. Some options for deferring income include: (1) if you are due a year-end bonus, having your employer pay the bonus in January 2020; (2) if you are considering selling assets that will generate a gain, postponing the sale until 2020; (3) if you are considering exercising stock options, delaying the exercise of those options; (4) if you are planning on selling appreciated property, consider an installment sale with larger payments being received in 2020; and (5) consider parking investments in deferred annuities.

· Accelerating Deductions into 2019. If you expect a decrease in income next year, accelerating deductions into the current year can offset the higher income this year. Some options include: (1) prepaying property taxes in December, keeping in mind the $10,000 limitation on deducting state income and property taxes and the fact that the property taxes must have been assessed in order to be deductible; (2) if you owe state income taxes, making up any shortfall in December rather than waiting until your state income tax return is due (and similarly keeping in mind the $10,000 limitation); (3) making your January mortgage payment in December; (4) making any large charitable contributions in 2019, rather than 2020; (5) selling some or all loss stocks; and (6) if you qualify for a health savings account, setting one up and making the maximum contribution allowable.

Foreign Bank Account Reporting

The IRS has become increasingly aggressive at tracking down individuals who have not reported foreign bank accounts. If you have an interest in a foreign bank account, it must be disclosed; failure to do so carries stiff penalties. You must file a Report of Foreign Bank and Financial Accounts (FBAR) if: (1) you are a U.S. resident or a person doing business in the United States; (2) you had one or more financial accounts that exceeded $10,000 during the calendar year; (3) the financial account was in a foreign country; and (4) you had a financial interest in the account or signatory or other authority over the foreign financial account. If you are unclear about the requirements or think they could possibly apply to you, please let me know at your earliest convenience.

Other Considerations

Here are some additional items to consider:

Flexible Spending Accounts: Generally, you will lose any amounts remaining in a health flexible spending account at the end of the year unless your employer allows you to use the account until March 15, 2020, in which case you’ll have until then. You should check with your employer to see if the employer gives employees the optional grace period to March 15.

Life Events. Life events can significantly impact your taxes. For example, if you are using head of household or surviving spouse filing status for 2019, but will change to a filing tax status of single for 2020, your tax rate will go up. Thus, accelerating income into 2019 and pushing deductions into 2020 may also yield tax savings.

Individual Healthcare Penalty. For 2019, the tax penalty on individuals who fail to carry health insurance, which was enacted as part of the Affordable Care Act, has been eliminated.

Moving Expense Reimbursement. If you received a reimbursement from your employer for moving expenses incurred in 2019, the reimbursement is taxable income. While taxpayers could previously deduct employment-relating moving expenses, this deduction is no longer available for moves taking place in years 2018-2025, unless you are a member of the U.S. Armed Forces on active duty and move pursuant to a military order to a permanent change of station.

Casualty and Theft Losses. If you incurred a casualty loss in a presidentially declared disaster area in 2019, it may be deductible. Any other casualty loss, along with all theft losses, are not deductible.

Section 199A Passthrough Tax Break. Enacted as part of TCJA, the Section 199A tax break allows a 20 percent deduction for qualified business income from sole proprietorships, S corporations, partnerships, and LLCs taxed as partnerships. If you qualify for the deduction, which is available to both itemizers and nonitemizers, it is taken on your individual tax returns as a reduction to taxable income. The new tax break is subject to some complicated restrictions and limitations, but the rules that apply to individuals with taxable income at or below $160,700 ($321,400 for joint filers; $160,725 for married individuals filing separately) are simpler and more permissive than the ones that apply above those thresholds.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Nine Top Elder Frauds to Avoid

One of the areas that regulators have begun to focus on in the investment industry is elder fraud. After hearing about the vicious scams endured by senior citizens, many by their own families, I’ve become more attuned to the clues that a client or relative of mine might be a victim of.

It happens too often: you’ve saved money all your life. Or, maybe you sold your business after investing years of hard work. You’ve chosen the smart path and have a comfortable nest egg as you set sail into retirement. Still, you always have to be on guard! Criminals seek to trick you into willingly handing over your hard-earned savings.

Elder financial exploitation quadrupled from 2013 to 2017, according to the Consumer Financial Protection Bureau. Specifically, these activities originated from unknown scammers, family members, caregivers, or someone in a nursing home. They involved more than $6 billion, with an average loss of $34,200. But in 7% of these instances, losses exceeded $100,000.

In 2017, elder financial exploitation reports totaled 63,500. Sadly, these reports probably represent just a small fraction of actual incidents. According to the FBI, more than 2 million seniors were victimized in the past year. Even former FBI Director William Webster, 95, was targeted in 2014.

Webster was promised $72 million and a new car…if he paid several thousand dollars to cover shipping. Ultimately, the caller was arrested. But not before his relatives in Jamaica had successfully scammed other U.S. citizens out of hundreds of thousands of dollars.

It won’t happen to me

If you’re thinking, “This can’t happen to me,” think again. The best and brightest can fall victim to a seasoned swindler.

While scams are only limited by the criminal imagination, the U.S. Senate’s Committee on Aging highlighted some of the more common scams in a report entitled “Protecting Older Americans Against Fraud“.

Listed below are the top nine scams. Please familiarize yourself with this list. If you have any questions, we would be happy to talk to you.

  1. IRS impersonation scams

Scammers impersonating IRS officials claim you owe money and pressure you to settle immediately. If victims make an initial payment, they will often be told that new discrepancies have been found in their tax records, which must be satisfied with another payment.

Don’t fall victim! The IRS will never call you to demand immediate payment. If there is a question about your return, you’ll receive a letter in the mail, not an e-mail, and there is a process to appeal any disputed amount. 

  1. Robocalls and unsolicited phone calls

Robo-dialers can be used to distribute prerecorded messages or connect the person who answers the call with a live person. IRS scammers may use this tactic.

Robocalls often originate overseas, and numbers are usually spoofed (fake) to hide their true identity. Have you recently received a call from someone whose phone number has your prefix? If you don’t recognize the number, it’s likely spoofed and not local.

The FTC has warned not to give out personal information in response to an incoming call. Identity thieves are clever. They often pose as bank representatives, credit card companies, creditors, or government agencies. They hope to convince victims to reveal their account numbers, Social Security numbers, mothers’ maiden names, passwords, and other identifying information. Sometimes all they’re looking for is to record and “steal” your voice imprint, so let them do the talking. Don’t answer any questions with “yes” or “no”, or even give out your name (see 4. below).

Unsure who you are talking to? Just hang up the phone.

  1. Sweepstakes scams / Jamaican lottery scam

Sweepstakes scams continue to claim senior victims who believe they have won a lottery and need only take a few actions, i.e., sending cash to the con artists in order to obtain their “winnings.”

Sometimes, it’s best not to answer a call if you don’t recognize the number. If it’s a friend, neighbor, relative or colleague, they’ll leave a voicemail message.

  1. “Can you hear me?” “Are you there?” scams

The goal: get your voice print saying, “Yes.” Then, the scammer charges your credit card using your “Yes.”

If asked, don’t respond. Just hang up. If you get a call, don’t press 1 to speak to a live operator to be removed from the list. If you respond in any way, it will likely lead to more robocalls–and more scams.

  1. Grandparent scams

“Hi Grandma/Grandpa, guess who?” When you respond, “This sounds like ‘Sally’,” the fraudster will say “she’s” in trouble and needs money to help with an emergency, such as getting out of jail or paying a hospital bill.

If you send cash, expect “her” to call you again, asking for more cash. Victims who were duped later said they had wished they had asked some simple questions that only their true grandchild would know how to answer. Have discussions with your loved ones about what safe word or phrase you might share if they’re really in trouble and need help.

  1. Computer tech support scam

Whether a computer pop-up screen or an alleged caller from Microsoft, scammers claim your PC is infected with a virus. Please note, Microsoft will never call you to inform you they have detected a virus.

Do not give control of your computer to a third party that calls you out of the blue. Don’t give them your credit card number.

  1. Romance scams

More and more Americans are taking to the Internet to find a partner. While some find love, others find financial heartache.

Be wary of individuals who claim the romance was destiny or fate. Be cautious if an individual declares his or her love but needs money from you to fund a visit. Or claims cash is unexpectedly needed to cover an emergency. These are huge red flags.

  1. Identity theft

This was the most common type of consumer complaint in 2016, with nearly 400,000 complaints.

Placing a freeze with the major credit bureaus helps prevent credit cards or loans from being taken out in your name. If you believe you are a victim, call the companies where the fraud occurred, place a fraud alert with the credit bureaus, and file a report with your local police department.

  1. Government grant scams

In the most common variation of this scam, consumers receive an unsolicited phone call from a con artist claiming he or she is from the “Federal Grants Administration,” or the “Federal Grants Department”–agencies that do not exist. Always remember, grants are made for specific purposes, not because you are a good taxpayer.

Do not wire funds to cover fees for the so-called grant.  Government grants never require fees of any kind. If you do, you’ll likely get more requests for additional unforeseen “fees.” If getting a sum of money to someone involves using pay services such as Western Union or going to say Walmart to transmit money, be immediately suspicious.

And, don’t give out bank information or personal information to these swindlers. Scammers pressure people to divulge their bank account information so that they can steal the money in their account. You wouldn’t give bank information to a stranger at the supermarket. You don’t know them. So, why give personal information to someone you don’t know who unexpectedly contacted you?

Always remember, you are in control. When in doubt, hang up. That is how you protect yourself.

If you suspect elder financial abuse, the American Bankers Association suggests the following steps:

  • Talk to elderly friends or loved ones. Try to determine what may be happening to their financial situation, such as a new person “helping” them with money management, or a relative using cards or credit without their permission.
  • Report the elder financial abuse to their bank. Enlist their banker’s help to stop it and prevent its recurrence.
  • Contact Adult Protective Services in your town or state for help. Report all instances of elder financial abuse to your local police—if fraud is involved, they should investigate.

Be on alert

At the end of this article, there is a list of useful tips that you can print. Place it near your phone. These cards can be a useful tool to help protect you against swindlers.

Final thoughts

Our mission is to help you reach your financial goals. We are proactive in our recommendations. But sometimes, a good defense is the best offense. It’s heartbreaking to hear stories of theft. We don’t want you to become a victim and another government statistic.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Tips to Avoid Scams 2019-10-31

 

Six Social Security Mistakes to Avoid

One of the most common worries I hear from clients is that social security won’t be there for them when they retire. Hence, many of them insist on claiming social security at the earliest possible age so they can get back as much money that they paid in as they can. Hint: social security is not going anywhere; a few tweaks in benefit payment and taxation of wages here and there, and it can be viable for decades to come.

“What if I die before I claim social security?” Most of the time, my answer is that the only ones who will care about that are their heirs, since it meant that my clients spent a little more of their nestegg patiently waiting for their benefits to grow. And in that case, there is usually plenty in the nestegg to keep them happy.

Social security rules are so convoluted and confusing that even I have a tough time remembering and reciting them. But hopefully with this article, I can help you avoid some of the most common mistakes people make when claiming social security.

On January 31, 1940, the first monthly Social Security check was issued to Ida May Fuller of Ludlow, Vermont. She received $22.54, according to the Social Security Administration. She was 65 years old at the time. She passed away at 100 years of age.

Ida May Fuller worked for three years under the Social Security program, paid a total of $24.75 in payroll taxes, and collected $22,888.92 in Social Security benefits.

Today, nearly 70 million people receive some form of assistance from Social Security. You and I will never receive the return on our contributions that Ms. Fuller received, but Social Security can and does play a role in supplementing savings accumulated over a lifetime.

Recognizing that Social Security supplements other sources of income, we can take proactive measures that maximize benefits while avoiding the pitfalls that poor choices can create.

With that in mind, let’s review potential financial Social Security potholes that can cost you money.

1. Collecting benefits too soon. You may begin receiving your retirement benefit at age 62…at a reduced rate. You probably know this, but let’s talk turkey.

If you were born in 1960 or later, full retirement age is 67. At age 62, your monthly benefit amount is reduced by about 30% of what you would receive if you waited until you are 67. The reduction for starting benefits at 63 is about 25%; 64 is about 20%; 65 is about 13.3%; and 66 is about 6.7%.

In casual conversation, it’s common for clients to ask us, “When is the right time for me to begin receiving benefits?” We usually respond with a less-than-definitive, “It depends,” because many variables, both objective and subjective, factor in.

If you have questions, let’s talk. We believe it’s important to tailor our thoughts and recommendations to your specific circumstances. Optimizing your spouse’s and your social security claim dates can literally add tens, if not hundreds of thousands to your retirement income stream.

2. You collect prior to your full retirement age while still working. If you are under full retirement age for the entire year, Social Security deducts $1 from your benefit payments for every $2 you earn above the annual limit. For 2019, that limit is $17,640. Ouch!

In the year you reach full retirement, Social Security deducts $1 in benefits for every $3 you earn above a higher limit. The 2019 income limit is $46,920. Only earnings before the month you reach your full retirement age are counted.

In many cases, the price of collecting Social Security while working and under full retirement age can be costly.

3. You are unaware that your Social Security may be taxed. IRA and 401(k) contributions may be deducted from income to reduce your overall tax bill. However, Social Security taxes paid by the employee are not deductible. But that doesn’t necessarily translate into tax-free Social Security income.

If you file a federal tax return as an “individual”  and your combined income (excluding Social Security) runs between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. Earn more than $34,000, and up to 85% of your benefits may be taxable.

If you file a joint return, the threshold rises to $32,000 and $44,000, respectively. Proper tax planning with your other income can help minimize the income taxes that apply to your social security benefits.

4. You decide to defer the spousal benefit. The longer you wait to take Social Security, the greater the monthly benefit, up to age 70. So, why not employ the same strategy for your spouse, if money isn’t the primary issue? Unfortunately, that may not be a wise choice.

The most your spouse may receive is 50% of the monthly benefit of the primary account that you are entitled to at full retirement age.  If your spouse waits past his or her full retirement age, he or she is leaving money with the government. Again, optimization of social security benefits can help figure out what claiming strategy makes the most sense.

5. Remarriage and your benefit. It’s complicated. You may already be aware that  divorced spouses are eligible for benefits tied to their former marriage.

 Eligibility is determined by these criteria: 

  • You were married for at least 10 straight years.
  • You are at least 62 years old.
  • Your ex-spouse is eligible for retirement benefits.
  • You are currently unmarried.

However, if you remarry, you lose the rights to your former spouse’s benefits unless your new marriage ends, whether by death or divorce.

I understand that the monthly Social Security check you receive may pale in comparison with the new journey you are about to begin, but it’s important that you are aware of the financial component.

6. How many years have you worked? Most of us understand one simple concept: the longer we wait to take Social Security (up to age 70) the higher the benefit (spousal benefit may be an exception–see #4). 

We also understand that higher wage earners can expect to receive a higher benefit. But did you realize that your monthly benefit is also based on your highest 35 years of earnings?

What if you haven’t worked 35 years? Social Security averages in zero for those years, which reduces your benefit. If you have at least 35 years, but some of those years are low earning years, they will be averaged in, creating lower benefit versus continued employment at higher wages.

Are you still working in your 50s or 60s? Great! Those after-school jobs in high school or years when your income may have been low, are removed from the benefit calculation if you’ve exceeded 35 years of income.

When we are factoring in pensions and retirement savings, those extra dollars may or may not amount to much, but I believe it is something to be aware of.

For some folks, Social Security may seem simple. For others, it feels as if you’re entering a complicated financial maze. If you have questions about Social Security or are uncertain how to proceed, feel free to give us a call. And of course, be sure to run any tax scenarios by your tax or financial advisor.

If you would like to review your social security options, get an opinion on your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Option Selling to Reduce Portfolio Risk — A Case Study in Ulta Beauty (ULTA)

I wouldn’t blame you if you read the title of this article and decided to just skip it. Indeed, when I talk to clients about selling call options against some portfolio positions they own, I can see their eyes glaze over before I even get to explaining the possible outcomes.

In case you need a primer, a comprehensive article I wrote several years ago explains the basics of working with options in “Using Options to Enhance Portfolio Returns” . For this case study, and since ULTA shares lost almost 30% of their value on Friday, I thought I’d walk through a good example of how selling calls against a position can mitigate a bad quarterly earnings report and loss of share value.

One of the positions we’ve held in client portfolios (and mine) since August 2016 is Ulta Beauty (ULTA).  For these past few years, calendar quarter after calendar quarter, Ulta has been reporting and beating earnings estimates, as well as raising forward looking earnings estimates. So when the price dipped in 2016 and 2017, I decided to buy shares for client portfolios, including my own. As a growth stock, Ulta does not pay a dividend.

The rosy quarterly earnings parade came to a tire-screeching halt this past week when, in a big surprise (shock?) to Wall Street and analysts, Ulta missed its quarterly earnings estimate and lowered forward earnings guidance. The stock was hit the hardest I’ve ever seen, losing almost $100 per share (30%) of its value on Friday alone. Just before the earnings announcement, the options markets (which handicap expected moves) were implying a +/-$20 per share move on earnings. What we ultimately got is known as a whopping five standard-deviation move instead. That’s epic as far as daily stock moves are concerned and those are quite rare.

To put that move into perspective, put options (stock options you can buy to protect your downside below a certain price) expiring on Friday August 30th, were not even available below the $260 price. That’s because, even at $260, options were implying that there was less than a 1% chance Ulta would be trading that low, let alone below $240. You usually see moves like this in risky biotech stocks failing an FDA drug approval, not a loved retailer.

So yes, in one trading day, Ulta gave back its entire stock appreciation of the past three years and is now trading back to the level it was at in June 2016. The entire client unrealized profit was wiped out overnight as algorithmic traders and portfolio managers dumped the stock en masse.

The sudden loss of profits is, needless to say, disappointing to put it mildly. For our case study, I want to point out where selling call options helped to hedge the position (i.e., reduce the risk) and actually allowed locking in profits along the period of time since ownership.

Shortly after we bought the shares in August of 2016, we began selling upside October 2016 call options against the positions. You must own 100 shares of a stock to sell one call option against it. Selling a call option means that for a small deposit to your account (known as option premium income), you sell someone the right (but not the obligation) to buy your shares from you at a certain price (i.e., the strike price) by a certain date (expiration date). So when the stock was trading at $255, we sold (upside) call options at the $270 strike level (collecting $340 for that first sale).

This meant, if Ulta was trading above $270 per share on or before expiration, the buyer of the option we sold could buy 100 of our shares for $270 each. If that occurred, our per share profit would be $1,500 ($270-$255=$15 x 100 shares) plus the $340 we collected for selling the call option. Therefore, our initial total profit, if the shares would have been “called” away, would have been $1,840 or 7.2%. Since this would have been a 45-day hold, the annualized return would have been a whopping 58.5%. All quoted figures don’t account for the small commissions incurred when buying or selling an option, which is about $4.95-$8.95 per transaction.

As it turned out, the shares never got called away (Ulta was trading below $270 on options expiration), and the October 2016 call option we sold essentially expired worthless, meaning that we got to keep the $340 we originally collected. This meant that we could do this again. And we did so by selling the November and then the December 2016 options at appropriate strike prices. The income generated through this process is called “option premium”.

Between 2016 and 2019, over a three year period, we collected and pocketed about $5,510 in option premium that we never have to give back, nor do we have any further obligation since the options expired. That’s a 21.6% return over three years, or a 7.2% annualized return on the cost of the 100 shares of Ulta owned. That certainly reduces (but doesn’t eliminate) the sting from the share price decline this past week.

Having those call options sold as a hedge against the position prior to the earnings announcement, clients did not suffer the 30% loss on the shares Friday.  Instead they gave up only 12.7%. That’s the power of option hedging.

To be fair, I should mention that the last call option we sold prior to earnings, was a $305 call expiring in January.  Had the shares gained 30% on Friday instead, our “upside” would have already been capped at $305 per share, and clients would have only participated to a much smaller extent to the upside. On the other hand, that cap would not have kicked in until January. Is it possible that the stock could recover by then? Options markets give that about a 15% chance today, so not likely. But then again, nobody would have ever expected Ulta to close under $238 on Thursday.

With the decline in the shares under $238, we closed the January 2020 call options on Friday for a 70% profit. To keep the shares hedged (while we decide what we ultimately want to do with Ulta Shares), we sold June $270 calls for $2,000 each. Unless the stock trades above $270 by June, we’ll get to keep the $2,000 and ….. here we go again!

In hindsight, buying put options (options that act as insurance against large declines like this one) to further protect our profits would have been prudent. But with the price of protection highly elevated, and taking into account the fact that we had call options sold against the position, I weighed the pro’s and con’s and decided against doing so.

Although my case study is about reducing risk through selling options, the lesson here is that taking some gains/profits in a stock during its march upwards, is a prudent move, whether you’re selling calls against your position or by just trimming the position. One never knows what happens, but you’ll be happy that you did when your stock gets hit like Ulta did. Ultimately, it’s not a gain until you take the profit off the table.

Disclaimer: None of the forgoing discussion is a recommendation to buy or sell any securities. It’s provided strictly for educational purposes.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

 

Broken Records or Records Broken?

Rearrange the two words “broken” and “record” and combined they have two totally different meanings. A broken record is akin to your financial planner repeating over and over again about saving more and spending less. A record broken conjures up images of olympic athletes taking their craft to higher, never before achieved heights.  We also hear it often when referring to never-seen before stock market levels.

We’ve all heard it said: “Records are made to be broken.” We celebrate record-breaking winning streaks from our favorite teams and athletes. Conversely, we hope to avoid a long string of losses.

The bull (up-trending) market that began in 2009 is not the best performing since World War II (WWII). That title still resides with the long-running bull market of the 1990s. But it is the longest running since WWII (St. Louis Federal Reserve, Yahoo Finance, LPL Research–as measured by the S&P 500 Index).

In the same vein, the current economic expansion is poised to become the longest running expansion since WWII. For that matter, it’s about to become the longest on record. According to the National Bureau of Economic Research, which is considered the official arbiter of recessions and economic expansions, the current expansion began in July 2009. It has run exactly 10 years, or 120 months, matching the 1990s expansion (see below table).

Economic Scorecard

Expansions Length in Months
July 2009 -? 120
Mar 1991 – Mar 2001 120
Feb 1961 – Dec 1969 106
Nov 1982 – Jul 1990 92
Nov 2001 – Dec 2007 73
  Average 64
Mar 1975 – Jan 1980 58
Oct 1949  – Jul 1953 45
May 1954 – Aug 1957 39
Oct 1945 –  Nov 1948 37
Nov 1970 – Nov 1973 36
Apr 1958  – Apr 1960 24
Jul 1980  –  Jul 1981 12

Source: NBER thru June 2019

Barring an unforeseen event, the current period is headed for the record books.

While the economic recovery is about to enter a record-setting phase, it has been the slowest since at least WWII, according to data from the St. Louis Federal Reserve. For example, starting in the second quarter of 1996, U.S. gross domestic product (GDP), the broadest measure of economic growth, exceeded an annualized pace of 3% for 14 of 15 quarters. It exceeded 4% in nine of those quarters (St. Louis Federal Reserve). Growth was much more robust in the 1960s, and we experienced a strong recovery from the deep 1981-82 recession.

Economic booms and long-running expansions can encourage risky behavior. People forget the lessons learned in prior recessions and overextend themselves. Consumers can take on too much debt. Businesses may over-invest and build out too much capacity. We saw euphoria take hold in the stock market in the late 1990s and speculation run wild in housing not too long ago.

That brings us to the silver lining of the lazy pace of today’s economic environment.

Slow and steady has prevented speculative excesses from building up in much of the economy. In other words, a mistaken realization that the good times will last forever has not taken hold in today’s economic environment.

Causes of recessions

In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). The long-running expansions of the 1960s, 1980s, and 1990s led to a mistaken belief that various policy tools could prevent a recession.

Yet, expansions don’t die of old age. A downturn can be triggered by various events. So, let’s look at the most common causes and see where we stand today.

  1. Rising inflation leads to rising interest rates. In the early 1980s, the Federal Reserve pushed interest rates to historically high levels in order to snuff out inflation. The Fed’s policy prescription succeeded, but led to a deep and painful recession.
  2. The Federal Reserve (The Fed) screws up. A policy mistake can be the trigger, for instance if the Fed raises interest rates too quickly and restricts business and consumer spending. This is a derivative of point number one. There were fears the Fed was headed down this road late last year. Credit markets tightened, and investors revolted until the Fed reversed course after the markets swooned nearly 20% in the 4th quarter of 2018.
  3. A credit squeeze can snuff out growth. In 1980, the Fed temporarily implemented credit controls that briefly tipped the economy into a recession.
  4. Asset bubbles burst. The 2001 and 2008 recessions were preceded by speculative excesses in stocks and housing.
  5. Unexpected financial and economic shocks jar economic activity. The OPEC oil embargo in the 1970s exacerbated inflation and the 1974-75 recession. The tragedy of 9/11 jolted economic activity in 2001. Iraq’s invasion of Kuwait pushed oil up sharply, contributing to the 1990-91 recession. Such events don’t occur often, but their possibility should be acknowledged.

Where are we today?

Inflation is low, the Fed is signaling its first possible rate cut this week, and credit conditions are easy as measured by various gauges of credit. For the most part, speculative excesses aren’t building to dangerous levels.

While stock prices are near records, valuations remain well below levels seen in the late 1990s (I’m using the forward price-to-earnings ratio for the S&P 500 index as a guide). Besides, interest rates are much lower today, which lends support to richer valuations. That doesn’t mean that swaths of stocks or sectors are not over-valued. That’s also not to say we can’t see market volatility. Stocks have a long-term upward (bullish) bias, but the upward march has never been and never will be a straight line higher.

As I’ve repeatedly stressed, your financial plan is designed, in part, to keep you grounded during the short periods when volatility may tempt you to make a decision based on emotions. Such reactions are rarely profitable.

A sneak peek at the rest of the year

The Conference Board’s Leading Economic Index, which has a good record of predicting (if not timing) a recession, isn’t signaling a contraction through year end. But one potential worry: a protracted trade war and its impact on the global/U.S. economy, business confidence, and business spending.

Exports account for almost 14% of U.S. GDP per the U.S. Bureau of Economic Analysis (BEA). It’s risen over the last 20 years, but we’ve never experienced a U.S. recession caused by global weakness.

By itself, trade barriers with China are unlikely to tip the economy into a recession. Per U.S. BEA and U.S. Census data, total exports to China account for just under 1% of U.S. GDP. Even with higher tariffs, exports to China won’t grind to a halt and erase 1% of GDP.

What’s difficult to model is the impact on business confidence and business spending, which in turn could slow hiring, pressuring consumer confidence and consumer spending. Simply put, there isn’t a modern historical precedent to construct a credible model. Hence, the heightened uncertainty we’ve seen among investors.

Is a recession inevitable?

It has been in the U.S., but other countries have more enviable records.

Earlier in June, the Wall Street Journal highlighted, “Australia is enjoying its 28th straight year of growth. Canada, the U.K., Spain and Sweden had expansions that reached 15 years and beyond between the early 1990s and 2008. Without the Sept. 11, 2001 terrorist attacks, the U.S. might have, too.”

If trade tensions begin to subside (a big “if”) and if the fruits of deregulation and corporate tax reform kick in, we could see economic growth well into 2020 (and with some luck, into 2021 and beyond). But, I’ll caution, few have accurately and consistently called economic turning points.

The Fed to the rescue?

Rising major market indexes for much of the year can be traced to positive U.S.-China trade headlines (at least through early May), a pivot by the Fed from tightening monetary policy to loosening, and general economic growth at home.

We witnessed a modest pullback in May after trade negotiations with China hit a snag. The threat of tariffs against Mexico added to the uncertain mood until June 4th, when Federal Reserve Chief Jerome Powell signaled the Fed would consider cutting interest rates to counter any negative economic headwinds.

While Powell is not exactly promising to deliver any rate cuts, one key gauge from the CME Group that measures fed funds probabilities puts odds of a rate cut at the July 31st meeting at around 100% (as of July 28 – probabilities subject to change).

I’ll keep it simple and spare you the academic theory explaining why lower interest rates are a tailwind for equities. In a nutshell, stocks face less competition from interest-bearing assets.

But let’s add one more wrinkle–economic growth.

Falling rates in 2001 and 2008 failed to stem the outflow out of stocks as economic growth faltered. And, rising rates between late 2015 and September 2018 didn’t squash the bull market.

During the mid-1980s, mid-1990s, and late 1990s, rate cuts by the Fed, coupled with economic growth, fueled market gains.

It’s not a coincidence that bear markets coincide with recessions and the bulls are inspired by economic expansions. Ultimately, steady economic growth has historically been an important ingredient for stock market gains.

Final thoughts

Control what you can control. You can’t control the stock market, you can’t control headlines, and exactly timing the market turns isn’t a realistic tool. But, you can control your portfolio.

While I would expect the market to continue higher over the intermediate term, it would not surprise me to have a mid-summer pullback as August-September tend to be weaker months of the year. Don’t let volatility shake you out of your positions, but if you haven’t done anything to take some money off the table up to this point, it would be prudent to consider taking some profits on certain positions and add some defensiveness to your portfolio. This is not a recommendation to buy or sell any stocks or other securities.

Your plan should consider your time horizon, risk tolerance, and financial goals. There is always risk when investing, but we tailor our recommendations with your financial goals in mind. If you’re unsure or have questions, let’s have a conversation. That’s what we’re here for.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

 

 

 

 

Tips to Teach Kids About Money

We may not even realize it, but most of our attitudes, fears and habits around money are formed when we are kids. How much our families made, how much they spent and even how much of an allowance we got, greatly influence how we feel and react to the lack of or the abundance of the greenback.

Kids learn the basics in school — reading, writing and arithmetic. But schools avoid almost any instruction about money. If they do offer a class, it may be an elective in high school, long after money habits have been formed.

I believe it’s important to start talking about finances early, when kids are young. You can begin to share your values and help kids shape their views on money in a culture that places a premium on “things,” not savings.

While we can’t shelter our children, we can teach them. It’s why I am sharing a guide of practical tips that I believe will help put your kids on the right path.

1. Teaching delayed gratification. This is the hard part. Some of us are better than others, but few have truly mastered the art of patience. After all, we are human!

Look at it another way for kids. Anticipation can be half the fun! It’s the journey. Think about it:  your kids awaiting the arrival of Santa, or the excitement that precedes going to an amusement park or on an upcoming family trip.

If they want to buy a pricey item, help them save for it. You can lend support by setting up various methods for savings. I remember the piggy bank. Money goes in, but never really comes out. Instead, consider setting up three jars: One for savings, one for giving, and one for spending.

2. Incorporate giving it away. I believe the giving jar is as important, if not more important, than the savings jar.

Do your children have a cause that resonates in their heart? Do they want to give to their church? Is there a local food bank or animal shelter your daughter or son can assist with donations?

Learning to let go and help those who are in need will create a stronger sense of altruism and selflessness that, if taught early, will blossom in them as adults.

When it comes to charity, let their treasure follow their heart.

3. Kids need money. Theory without practice won’t work. Kids need a hands-on lesson. You may start with an allowance (some refer to it as a commission)—you may pay kids for various chores, or both. That’s a parenting preference, and there are advantages to both.

What is an appropriate allowance? According to a study by RoosterMoney published by The Balance, the weekly allowance earned by a 4-year-old averages $3.76. At 8 years of age, an allowance averages $7.27 per week. At 12, the allowance is $9.85 and $12.26 at 14.

The study offers reasonable guidelines, but you may adjust at your discretion.

What about birthday gifts, Christmas gifts, etc.? Set goals with your children, but I lean heavily toward the savings bucket. Those annual gifts will add up over the years. Your kids could graduate high school with a tidy sum of cash if they have the discipline to save.

4. Teach by example. I remember a time I paid for my purchase at the gasoline pump, got back into my car, and drove away.

 My young daughter accused me of stealing!

She understood the idea that “what’s not ours isn’t ours,” but she didn’t grasp the concept of “plastic money.”

 I explained how I paid without going into the store, discussed the concept of a credit card, and emphasized these purchases are always paid in full at the end of each month. Today, I still impart the benefits and dangers of credit cards.

Was this a lifetime lesson for her? I certainly remember helping my parents pay their credit card balances off in full each month.

In addition, consider using lists when shopping. Your children will see that it helps avoid impulse buys. And, as kids grow older and the discussions are age appropriate, explain why you try to avoid impulse purchases. Oh and it goes without saying: never shop for groceries/food when you’re hungry.

Use various examples from your own life when you teach your kids about the importance of money and savings.

5. Encourage summer and after-school jobs. Trading time for cash via a job helps kids learn the invaluable lesson of hard work. It also supplements savings and provides spending money.

Cutting your own or the neighbor’s grass, shoveling your own snow or the neighbor’s snow, yard work, a lemonade stand, babysitting, helping in the family business, working retail, household chores, or working as a lifeguard are options.

Besides the extra cash, they will learn a strong sense of pride and responsibility that will carry over into adulthood.

6. Open a savings account. Not that long ago, a savings account earned a respectable interest rate. That’s not the case today. Still, a savings account helps kids learn.

A 5-year-old may not need a savings account, but adulthood isn’t far away for a teen or pre-teen. As young adults they will have a checking account, debit card, and eventually a credit card. Baby steps in the right direction will ease the transition.

As they grow older, discuss the benefits of investing with your kids. Outside of a college savings account, you may open an investment account or Roth IRA in their name and teach them about investing. You could start it with seed money and have them contribute on a regular basis (they need earned income to contribute to a Roth IRA). More importantly, help them buy into a savings goal. That way, they will take ownership.

If you’re unsure about how to start the process, we’d be happy to point you in the right direction.

7. There’s an app for that. Today, there are mobile apps that can help kids. Bankaroo, iAllowance, and PiggyBot are just a few. Feel free to look online for one you feel is most appropriate for your child.

8. Guide them with goal setting. Are they trying to save for something? Help them come up with a plan and incentivize with matching funds. Companies do this with 401(k)’s, why can’t parents?

Discuss the importance of needs versus wants. A teenager may need a bicycle. But do they need one with all the bells and whistles? Or, are there reasonably priced bikes that won’t bust the savings account?

9. Money isn’t everything. Yes, it’s important. It gives us choices. But by itself, money can’t buy happiness.

10. Let them make mistakes. Ashley LeBaron, a graduate student at the University of Arizona, said, “Let them make mistakes so you can help them learn from them, and help them develop habits before they’re on their own, when the consequences are a lot bigger and they’re dealing with larger amounts of money.”

Not surprisingly, her research showed those who had practical experience with money during childhood learned how to work hard, how to better manage money, and how to spend it wisely.

That may be the most important desired outcome.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

 

Big Changes Coming to Retirement Plans

There are multiple bills before Congress now that are intended to help IRA owners and  participants invested  in workplace retirement plans such as 401(k)s. The proposals have some overlapping provisions, along with a number of important differences.

The House of Representatives passed a retirement bill (known as the SECURE Act) on Thursday which includes an assortment of changes for participants in 401(k) plans and owners of IRA’s. The Senate may be poised to pass the bill, or a similar one, quickly and send it to the president, who is expected to sign it. Here’s a look ahead:

Convert your IRA Into an Annuity

It’ll become easier to convert your retirement savings into a steady lifetime income—a feature common to old-fashioned pensions—by buying an annuity in a 401(k)-style retirement plan. Currently, only 9% of employers offer this option, according to Vanguard Group Inc.  Employers would be able to choose whether to offer an annuity and, if so, which type to offer.

Keep Contributing after Age 70½

The bill repeals the age cap for contributing to a traditional IRA, currently 70½, making it easier for people with taxable compensation to continue saving if they continue to work.

Defer Required Minimum Distributions Until Age 72

Under current rules, you must start taking minimum (taxable) withdrawals from your IRA or 401(k) when you turn age 70½. Under the new bill, the age to start taking required taxable withdrawals from 401(k)s and IRAs would increase to 72.

See How much Income Your 401(k) Supports

The legislation would also make it easier for employees to understand how much monthly income their 401(k) balance supports by requiring employers to disclose an estimate on 401(k) statements. So participants would see not only their account balance on their statements, but also a lifetime stream of monthly payments based on expected-mortality tables.

Part-time Employees Can now Participate in 401(k)s

The bill requires 401(k)-style retirement plans to allow long-tenured part-time employees working more than 500 hours a year (employed for at least three years) to participate.

Penalty-free Withdrawals for Expenses of Adoptions or Child-birth

The bill would allow you to take penalty-free distributions from 401(k)s and IRAs of up to $5,000 within a year of the birth or adoption of a child to cover associated expenses (normally, a 10% penalty tax applies for pre-age-59½ withdrawals). You will still owe taxes on the withdrawal.

Inherited IRA’s “Stretch” Limited to 10 Years

Currently, with a few exceptions, those who inherit an IRA can elect to take required minimum distributions over their lifetimes, which could stretch out for decades. Under the bill, heirs would no longer be able to liquidate the balance over their lifetime and stretch out tax payments. Instead, if you inherit a tax-advantaged retirement account after Dec. 31, 2019, you must withdraw the money within a decade of the IRA owner’s death and pay any taxes due.

Exceptions are provided for surviving spouses and minor children (under 18), folks who are less than 10 years younger than the account owner, and the chronically disabled. Planning distributions during this 10 year period will be crucial to heirs to avoid the highest tax rates from large distributions.

Utilize 529 Education Savings Plan Money To Pay off Student Loans

You’d be able to withdraw as much as $10,000 from a 529 education-savings plan for repayments of some student loans (including siblings), registered apprenticeships and homeschooling costs.

Group 401(k) Plans

An estimated 42% of private-sector workers don’t have access to a workplace retirement-savings plan. Under the bill, employers without retirement plans would have the option to band together to offer a 401(k)-type plan if they choose.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Source: Wall Street Journal

 

 

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